So hopefully you've read my previous blog post that covered how to make the most out of business travel which laid out some nice tips to maximize those businessman perks. Also, you must read my second post that walked you through creating your budget which is honestly the most important step of all. Now you made your budget, you've paid off all debt that is charging high interest, you're getting creative with your spending, you know exactly how much you’re saving, and you're done...WRONG. If you thought a spreadsheet detailing your spending was intimidating, wait till you decide you want to start investing. Where do I go, how much money do I need to begin, I buy all Apple stock right, why invest anyways? These are the types of questions that scare and/or confuse people which either causes them to put off investing until the all illusive “later” or make some knee jerk decisions...trust me I've done both. In this post I will introduce you to some great tools as well as helping you avoid rookie mistakes I’ve made myself.

The first step is admitting you have a problem. Your problem is the ultimate enemy and its name is inflation. Inflation is basically how much more would the same thing cost you today versus last year. This number is not created based off of one item but is instead based off a large list to try and capture the total increase in goods. I think we all understand that $20 today doesn't buy you as much as it did in 1950. In fact $20 in 1950 is equal to $198 today. Imagine rolling through Taco Bell and ordering off the 10 cent menu. So what? Well the "so what" is that $100 in a given year will on average have the buying power of just $97 the following year because historically inflation is 3%. Every year you let your money just sit there in the bank you are in fact losing money. You now know your problem so let’s begin to outline the solution.

You need your money to work for you harder than inflation is working against you. That delta between inflation and the returns on your investments is the amount of money you will get to live off of without touching your principle when you are retired and no longer have regular income. If you have $1,000,000 in investments, inflation is 3%, and your investments earn 7%, then that means you can spend 4% (that’s the delta I mentioned) or $40,000 every year and never even touch the $1,000,000. This delta between inflation and returns is also a huge part to reaching retirement. Let's say Mr. Dumb puts away $10,000 into a savings account which has practically 0% returns and Mr. Smart puts that $10,000 into an investment account that averages returns of 7%. Keep in mind that both are dealing with 3% inflation. Mr. Dumb and Mr. Smart wait 30 years and compare their numbers. In the end Mr. Dumb's account went from $10,000 in buying power to $4,010 while Mr. Smarts buying power grew to $32,400. Mr. Smart now has eight times more buying power than Mr. Dumb. The reason Mr. Smart’s account grew so much is thanks to compounding interest. Compounding interest is when the money you made is making money. $10,000 * 4% return (7% - inflation) = $10,400 which is an increase of $400 in the first year, then the second year is $10,400 * (4% return) = $10,816 which is an increase of $416. Compounding interest allows the increases to have increases...Inception? So inflation takes the same money in a savings account and makes it worth less (even though you didn't spend anything) and compounding interest takes the same money in an investment account and makes it grow faster and faster (without saving anything). You know inflation is bringing your money down, you know you need your money to grow, and you know investing is the solution for growth so now let's go through some advice on how to start your investing.

Hopefully I have convinced you that investing is a good idea and if you don't believe my take on it why not check into 99% of wealthy human beings and see if they invest...spoiler alert: they invest a lot. Now you need to know what kind of investing you want to do. There are individual stocks, ETFs, mutual funds, IRAs, and 401ks that all move based on the stock markets. Yes, I said markets (plural) because you can invest in the U.S. stock market as well as international markets. There are also investments in things you can invest in that don't have a strong connection to the stock market like real estate. These can be bought in shares just like stocks and are often called alternatives. This is the point where most people see all these options or accidentally stumble onto CNBC and see a thousand numbers with charts going all over the place and they think "Ain't nobody got time for that!”. Don’t fear, there are some extremely simple ways to invest and now I’ll walk you through those steps.

First, if you're company offers a 401k program with any percentage match do that immediately. If the company offers 5% match it means that if you will automatically deduct 5% of your pay and have it invested then they will put the same amount of money in there for free. Example: If you make $4,000 a month on a paycheck normally and decide to participate in a 401k match program of 5% your paycheck would then be $3,800 and your 401k account would get $200 from you and $200 from your company which means you now have $4,200 instead of $4,000. There's nowhere else on earth you're going to get 100% return on investment so that is step number one. With 401ks and IRAs there are two different flavors (Roth and Traditional). Roth accounts tax the money before it goes in but any interest they earn won't be taxed when you withdraw it, while Traditional accounts go in tax free but then tax it all when you withdraw it. Roth accounts will also let you withdraw any of the money you put in without penalty but if you touch any of the earnings before age 59.5 you will have to pay the penalty. Traditional accounts are completely hands off until 59.5. There are some exceptions like when you get ready to buy a home. To pick between the two you'll need to consider what tax bracket you are currently in and what tax bracket you will be in around retirement. Personally I assume I am currently in a lower tax bracket than my retirement tax bracket so it's better to pay the taxes now (Roth) but a few years from now I believe I will cross into a higher tax bracket than retirement and will transition to deferring taxes (Traditional). Because Traditional accounts are pre-tax they lower your taxable income according to the IRS. So if you make enough money that it puts you into a high tax bracket you can put money into a Traditional account to lower your tax bracket. These are all great ways to invest for your golden years in a very tax efficient manner but if you're following the Savings Sherpa you will be looking to fill that 15+ year gap between retirement and 59.5 when your 401k/IRA becomes available. So let's now cover the investing that will provide for you during those early retirement years while your buddies are stuck in a cube farm.

Investments such as individual stocks, ETFs, mutual funds, etc. are often referred to as taxable accounts. These types of investments require you to pay taxes on all the earnings in the year it was received. The most important aspect of these investments is that they are available anytime unlike 401k/IRA and will fill the gap between your early retirement date until that 401k/IRA money can kick in at age 59.5. The position of this blog will always be to increase the likelihood of an early retirement. This is done through high savings and steady returns. This is one of the reasons I would eliminate the strategy of building your nest egg on individual stocks. Individual stocks are much more volatile than the overall market so they could make you rich or leave you out on the street. The average return for the overall stock market from 1950-2009 adjusted for inflation was 7%. With an aggressive savings strategy this 7% return is going to be plenty to allow for an early retirement. This means individual stocks would introduce risk that isn’t necessary just to be greedy. So you are saving aggressively, you know that you need to invest to combat inflation, you meet your employer 401k match or max out your IRA, and now you want to take advantage of the long term 7% steady returns from the overall stock market. So where can you turn? Well how bout I just tell you.

The key to getting compounding interest and more predictable 7% returns is time in the market (not timing of the market). To get the most time we must avoid "paralysis by analysis" or simply overthinking instead of acting. To do that we need some simple venues for you to invest. This is where something like Betterment can come in. Betterment has no minimum to begin so even if you only have $100 you can begin investing. If your account is under $10,000 it is best to set up an automatic deposit so you can lower your fees. Betterment builds your portfolio using low cost funds that track the overall market and pay dividends (money a stock pays you even when the stock goes down) all while it automatically diversifies your investments for you. This is a really good option if you're too intimidated to transition from the piggy bank to investing. This is exactly the position I was in less than a year ago so there's no shame at all in that. Betterment's fees are really not that bad at 0.35% for accounts under $10,000, 0.25% for accounts between $10k and 100k, and 0.15% for accounts over $100k. They aren't too bad, but I found out after a few months that there is a way to do it better. It would be a little more complicated, but if I cut out the middle man (Betterment), purchase those index funds myself, and keep the same amount of diversification then it should lower my fees. I know this can be done because I have recently done it.

To keep its fees so low Betterment uses certain index funds, a lot of which come from the investment company Vanguard. Vanguard has all kinds of index funds with fees as low as 0.05%. Going from 0.35% to 0.05% fees may not sound like much but it can really add up with compounding interest as mentioned earlier. Now how do we choose how much of each type of fund we need to be properly diversified? What I did was take a look at the portfolio Betterment built for me using an amazing and free online tool/account called Personal Capital. I've mentioned Personal Capital before as a way to track the value of all your accounts in one easy to use website but it is much more powerful than that in regards to investing. Personal Capital has an allocation tab underneath the portfolio section that shows you exactly what percentage of your money is in each type of investment. Below you will see the allocations I currently have. Discussions on exactly how you get to this allocation would be its own blog post but this is a very good allocation for being somewhat aggressive (low % of bonds) while being safe (extremely diversified, low cost, and dividends).

Now that we know how much money should go into each section we can go straight to Vanguard and buy our funds directly. Once you have an account you'll just type in the ticker symbol and buy as many shares as needed. For U.S. stocks you can use VTI (that's a ticker symbol). For International stocks you can use VEU. For Alternatives (like real estate) you can use VNQ. Then for Bonds you can use a mix including MUB. So if you had $10,000 you could buy $5,523 of VTI, $2,935 of VEU, $293 of VNQ, $909 of some different bonds, and $340 to put in a cash account. That will get you on a great sustainable path to investing and early retirement. It is my hope that you are now clear on what you can do, why you need to do it, and that now is the time to do it.

RECAP:

Inflation means your money isn't worth as much next year as it is today

Take advantage of employer match without question

Compare current earnings to future earning and take advantage of tax efficient accounts (IRA / 401k)

If you feel comfortable, go out to Vanguard and buy your index funds directly

Keep feeding the machine and never withdraw any money

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Creating a budget and documenting it are the most important parts of your financial independence journey. Without this you will never be able to calculate your spending or savings rate. Spending and savings rates are needed to calculate how much money you will need to retire and how long it will take you to reach that number. Today will not be focused on maximizing or lowering your budget instead this is the simple step of getting your initial budget. Below we will walk through some simple tips to getting your budget set up.

The first thing you should do is calculate your monthly income after taxes. On this blog you can always assume that all values listed are calculated after taxes. These are the only numbers relevant and allow you to compare your numbers to someone else regardless of special tax circumstances that stem from marriage, state of residence, or profession. Your income number will be used to calculate your savings rate.

The real budgeting starts when you calculate your spending. I highly recommend purchasing everything with a rewards credit card or debit card to make tracking purchases easier. I know that if I have $100 in my pocket and a week later have $20 there is almost no chance I can tell you what exactly happened to that $80. Make sure you link your credit card to your bank account and set it up to automatically pay the entire balance every month. If you do this and choose a card with no annual fee you will get paid to purchase things all while increasing your credit score. Before you get too worried about setting a goal for a savings rate or calculating your retirement date, you should take at least two months to document all your spending to get a ball park idea of where you are.

There are several good tools out there to help you see where your budget currently is so that you can begin creating your new and improved budget. Of course I would recommend my own Basic Budget Tool first. I must warn you that this tool should be used on a computer because it doesn't look so pretty on a tiny phone screen. It may look intimidating but I assure you it's simple and if you have any trouble just let me know. This tool will ask you to pick a savings rate (may need to adjust after a few months), enter your monthly post tax income, and your current net worth. Then you will manually input every purchase into its designated category. I believe there is a real psychological benefit to manually inputting each purchase. This forces you to watch your savings rate go down every time you make an entry. I log on to my credit card once a week and input all the charges which takes about 5 minutes. There are some screenshots at the end of the blog showing the Basic Budget Tool used with the given example.

There are also some automated tools out there to help you get started but be aware that it's almost impossible for an automatic system to put your spending or incoming cash into the correct categories. I really like Personal Capital because it can show your spending as well as really in depth information on your investments and allocations. Another really popular tool is Mint. I would say Mint is more geared towards simple tracking of spending while Personal Capital is better once you have investments and are tracking your spending on your own. I use Personal Capital to give me one website and one login for checking the current balance on all bank and investment accounts...really handy since I now have SIX but that's another blog all together.

After you track your spending over a couple months you can begin to construct your new budget. I'll use some arbitrary numbers along the way to make it easier to follow along. First take your monthly post tax income ($4,000) and subtract any unchangeable expenses. These would be things like rent under your current lease, child support, or payments under an ongoing contract. Say $4,000 income minus $700 for rent, $50 for gym, $50 for cable/internet, $50 for cell phone, $100 for utilities and $125 for a charitable sponsorship leaves us at $2,925. Then take all your non monthly payments (car insurance, health insurance, yearly memberships, etc) and divide them by 12 (for a monthly equivalent). Let's assume $1200 car insurance, $1000 health insurance, and $100 amazon prime membership comes out to $2300 or $192/month leaving us at $2,733. This $2,733 is our trade space between money we can spend and our savings percentage. For aggressive early retirement I recommend no lower than 40% which allows you to retire in 22 years (that math is another blog coming soon). If we went with 40% (.4*4000) we would need to save $1,600 leaving us at ($2,733-$1600) or $1,133 a month to spend. If you have ANY debt that is charging you interest you put as much as you can stomach towards that before worrying about saving a single penny. All these numbers and percentages are easily calculated for you using the Basic Budget Tool. So where does the $1,133 go?

Now you have knocked out your uncontrollable monthly bills, set aside money for annual bills, and saved 40% of your check so it is time to spend that last $1,133. These will be your non-standard spending like gas, grocery, eating out, travel and miscellaneous charges which can greatly differ from month to month. Let's say $80 for gas (do they even charge for gas anymore?), $180 for groceries, $100 eating out, $300 plane ticket to Florida, $150 Air BnB for the weekend, $100 on clothes (I'm running out of ideas to buy), and $223 worth of parts for your sweet 1988 Suzuki Samurai. I would hope you agree that these purchases don't sound like someone being extreme or obsessive with saving and still managed 40% savings. The only reason I threw in this scenario was to show you that it is very possible to save way more than you ever imagined and still live a fun life with trips an luxury purchases. Once you see how capable 40% savings rate is you can try for 50%, saving that extra $400 a month could shave 5 years off of your working career. Hard to put a price on 5 years of your life but I just did.

Obviously everyone's situations are different but the principles are all the same. You make a certain amount of money, you have certain bills that must be paid, and then you decide what to do with the rest. The real difference comes from how you alter these principles. Do you trade living alone for a roommate so that you can retire 5 years sooner or the ability to fly somewhere once a month? Do you get off of that normal cell phone plan and swap to Google Fi? Do you meal prep instead of spending the average of $24.74 a week just for lunch/coffee at work? Most people have no idea how much money they spend and can't begin to make these trade-offs until they set down and really track their spending. Heck, you'd be amazed at how many people don't know how much they really make. When I tell people I want to retire early they tell me it can't be done but math says I can, they tell me they couldn't give up "living" life but my personal spreadsheet shows a plane ticket purchase in nearly every month, a Mexican orphanage sponsorship, masters classes and I still have maintained a 58% savings rate for a year straight. It's no different than when people tell you they are eating healthy but can't lose weight. Can they actually show you how many calories they take in? Always trust numbers over opinions, and I challenge you to go get your numbers and then as 50 Cent once said, "let them hate and watch the money pile up".

RECAP:

Find out what you make after taxes

Find out what you really have to spend

Lookout for those payments that may not come every month

Pay off all debts that charge interest before padding your savings

Save 40% or more if possible

Look for ways to shave off the money on remaining categories

TRAVEL!

Below is a screenshot from the Basic Budget Tool that shows the scenario listed in the blog. The only numbers I put in for the specific month where the individual purchases and account balances. All other statistics were created automatically. The savings rate goal, net worth, and monthly income were inputs for the start of the year.

If you look too closely at your finances you will drive yourself crazy. For example, a constant live feed to the stock market probably isn’t the best idea. I admit I’m guilty of obsessing over numbers, but this outlook will not help long term. Keep your savings rate as aggressive as possible and you'll be fine. But just as life can throw you some curveball expenses, like your 88 Suzuki Samurai locking up and gushing brake fluid, it can also throw you some favors.

In this post I want to focus on some positive things that travel has brought me recently, but things don’t always work out this smoothly. In the future I’m sure I will have negative scenarios to address and promise to never sugar coat the "experiment”. My ultimate goal is to inspire you be on the lookout for creative ways to pad that illusive net worth. Although traveling seems like an inopportune time to save money here’s how I did it and here are ways to apply it to your own situation.

About a month ago I learned that I had to spend two weeks in Ohio at the beginning of February. No offense Ohio, but you're not exactly the winter escape I was dreaming about. So... I wasn't super thrilled about it. Then my little financial formula fixations began to take over and I realized what an opportunity it could be.

For the week I was given a rental car (that’s two weeks without buying gas out of pocket). I would be put up in a hotel. Ideally that should minimize the utilities back home. Even though I can't watch over the thermostat the way I'm all too famous for doing. I was also be given an "allowance" or per diem of $58 a day for 12 days tax free and $82 a day that could only be used towards a hotel. This is where you can go one of two ways. You can view that as "free" money and blow it on things you don't need. Some wouldn't even factor it into their budget or long term goals. Or you can maximize the opportunity and stick to the financial experiment. Although I love random trips, traveling, concerts, and experiences in general, I chose to maximize. Seeing at that I was in a cold region without friends and no real sites I hadn't already seen, what would be the point of wasting that money? It was time to maximize my resources. Here’s how I did it.

First I looked at the list of hotel options presented to me that where within my $82/day budget. Unlike per diem, whatever money is spent under the $82 is not given to me. Because of that factor, it was important that I find a hotel that gave me the most value (aka hot free breakfast...not honeybuns). After realizing that all the decent hotels in that range were booked, I decided to do something a little outside the box.

I found a hotel that offered not only a breakfast spread fit for a king, but also served a full dinner four nights a week with beer and wine. This option was $90/night so I had to cover the difference out of my per diem leaving me at $50/day, but now I could pack to-go boxes from the meals provided. This way I wouldn’t have to eat out and use my daily budget. Not eating out also gave me a lot more control over my calories because I'm terrible at paying good money for something healthy. Those cheese fries just scream out my name. I actually stopped by a dollar tree and bought a four pack of plastic containers to store leftover breakfast/dinner items provided by the hotel. On nacho night I brought back a plate of lean shredded pork to add some protein to some nice vegetable soup which allowed me to make some healthy choices. A huge plus was all the Greek yogurt and fruit you could ever want.

Not eating out also gave me more time to be productive. Taking masters classes, being in Ohio for a class, and trying to get my Security+ certification meant I was in a huge need for some quality study time but there was one more task that really had me excited. I started the idea several months ago of putting together a blog and accompanying budget tool. I got about 10% done and then just got too busy. So with my newly found free time, I started a blog, wrote my first post and perfected my budget tool for all of my fans...well all two of you. And i’m sure I studied somewhere along the way.

The one weekend I was in Ohio was Super Bowl weekend. I considered all the usual giant chain sports bars but while looking through an events page for Dayton I came across an advertisement for a Super Bowl potluck at American Legion Post 776. I decided that I would rather take part in a community event and assumed I could make a frugal fixin for the party in exchange for food and come out cheaper than the big chain sports bar. I started browsing deals at local grocery stores using the Flipp app and found avocados 3/$1, limes for 15 cents, and guacamole mix for 77 cents. Now I had a large portion Super Bowl snack that I made easily in my hotel room for $2 and access to a nice community watch party with amazing home cooked foods. Just another creative way to get the most out of my trip while keeping the expenses low. .

Now let’s take a big picture look at what I saved while in Ohio. In the end, I took the Ohio trip I wasn’t looking forward to and turned into $600 net income plus two weeks of gas savings for a total of about $640 positive impact to my monthly budget. Instead of wasting the money I was given on eating and drinking alone at a random restaurant, I now have that money for other more exciting adventures. I plan on taking 50% of the $600 to cover a weekend in Keystone — way more fun than middle-of-nowhere Ohio. The other 50% goes into savings because I don’t subscribe to the “free money” outlook mentioned earlier. All in all the once dreaded trip turned out to be a big positive.

There is going to be some days when you back over the mailbox, lose your wallet, or your car breaks down. But there will also be days of opportunity that you can turn into savings and experiences. It is up to you to take advantage of the opportunities when you can to balance out the bad.